Two years of the pandemic and recent military conflicts have radically altered the future of cross border trade and supply chain. Enterprises began realising that threats such as these are no longer uncommon and, for better agility and resilience, many have taken important steps to mitigate future supply chain disruptions by enhancing their digital capabilities.
However, a key component in the supply chain network is still lagging behind in modernisation. The need for the trade finance sector to overhaul its age-old ways of operating has never been more critical in today’s corporate banking landscape. As digitalisation sweeps through industries, speed has become a non-negotiable requirement for businesses to be considered worthy of a customer’s time.
Global supply chain is pivoting towards digitally reinforcing processes due to demands from businesses for greater efficiency, transparency and swift transactions to deliver on their own customer expectations. As the lifeblood of the supply chain, trade finance can no longer afford to remain stuck in piles of paper documents and must modernise as a matter of urgency to keep up with the changing cross border trade landscape.
The drawbacks of being stuck in the past
Trade finance is one of the oldest sectors in the world and has, historically been very paper and labour intensive. Unfortunately, with advances in automation and demands for faster communication flow, the traditional trade finance system is fast becoming unviable. A cross-border trade ecosystem is a complex one involving multiple parties with tons of document exchanging hands between them at every point.
If banks continue on the path of manual and labour-intensive ways of managing trade finance, the outcome will likely be more process inefficiencies, increase in costs, delays in credit analysis, data privacy concerns and, worst of all, endless susceptibility to fraud. While fraud is not new to the trade finance landscape, the losses as a result are always astronomical.
The most serious form of fraud banks are faced with in supply chain is duplicate trade financing. This happens when an invoice is financed multiple times and has beset the industry for a long time. One of the most prominent recent cases involved Hin Leong, a Singapore oil trading company, which led to more than 20 banks incurring around US$3.85 billion in losses.
The occurrence of duplicate trade financing fraud can be attributed to lack of visibility and transparency which hinders collaboration between financial institutions resulting in the inability to share critical data in timely fashion. As competition intensifies, especially with the rise of fintech firms, financial institutions can ill-afford to be constantly at the wrong end of such malpractices.
The blockchain way forward
Considering the challenges of the traditional system confronting trade finance, swiftly initiating modernisation with the use of blockchain is the way forward. Embracing blockchain will help alleviate a lot of the present concerns and risks in trade financing. In a supply chain flow, high volumes of documentation exchange hands including product, shipping and transaction details. In a centralised system, timely communicating vast information is really tough, Processes take days or even months to get done in an era where information is demanded by the hour or even minute.
When trade finance is done on a decentralised blockchain, all transactions are recorded in a database and subsequently distributed to various locations and relevant stakeholders. This allows for immutability of information, improved compliance, better traceability of activities, and long-term cost and risk reductions. Blockchain also enables greater overall transparency and faster transaction tracking, visible only to authorised members of the network, building greater trust among supply chain participants.
Realising the full potential of blockchain
In a cross-border trade scenario, interactions involve multiple parties such as the importing and exporting companies, logistics services, banks and insurance companies. It requires all participants to buy into the impact digitalisation will have on trade finance, display strong commitment to the cause and make conscious efforts to be aligned with executing financing on the blockchain.
To set the standards, financial institutions and large organisations must lead the way with blockchain adoption and, in turn, assert their influence on the rest of the network to follow suit. This could also potentially help increase the urgency for laws and regulations to be crafted to support or enforce the use of blockchain technology in the overall supply chain process.
(The author is Mr. Farooq Siddiqi, CEO, #dltledgers and the views expressed in this article are his own)
